The Real Value of Business Schools

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Monday, April 22, 2019
By Glenn Hubbard
Photo by iStock
With the relevance of the MBA in peril, business schools must re-evaluate their purpose to ensure they continue to add value to the market.

"The business of business schools is teaching business.” Harvard Business School’s Robert Simons made that simple declaration in “The Business of Business Schools: Restoring a Focus on Competing to Win,” published in January 2013 in Capitalism and Society. Yet schools still face a crucial question: How should we teach our primary subject?

We ask this question at an apt time in our history, as many institutions—including Columbia Business School— have reached their centennial anniversaries. Over the past 100 years, business schools have evolved from trade schools delivering purely professional preparation to places of academic innovation and social science research. But many graduate programs are feeling the pressure exerted by rising education costs and declining application numbers, and many could succumb. Within the next decade, it’s likely that only a handful of large full-time, two-year MBA programs will remain, at least in the U.S.

In light of this very real possibility, we must rigorously confront and clarify the purpose and mission of business schools. Just as we advise chief executive officers and corporate directors to determine what business they are in, we, too, must engage in the same fundamental inquiry into the student experiences we offer, the faculty we hire, and the role our programs will play in the business world.

Downward Trends

By some measures, it might seem as if the MBA is as strong as ever. According to the Financial Times, on average MBA holders double their salaries within three years of graduating. (See “The MBA Uplift” below.) But that payoff is not as attractive to prospective students as it once was. While some schools, including those in Europe and Asia, have seen their numbers of applicants increase, the number of applications to full-time MBA programs in the U.S. has declined every year since 2014, according to the Graduate Management Admission Council’s “Application Trends Survey Report 2018.” (See “The Rise of Non-MBA Business Programs” in the next section.)

GMAC data showing that MBA degree holders double their salaries within three years of graduation

Data show that, on average, MBA degree holders double their salaries within three years of graduation. Even so, the number of applications to full-time MBA programs in the U.S. has declined every year since 2014, due in part to increases in tuition costs, decreases in employer-sponsored applicants, and growing interest in MBA alternatives such as one-year master’s programs.

There are several reasons for this decline. First, the cost of business education is rising. Second, there’s a growing sentiment among management professionals that an MBA is no longer a must-have degree for career advancement. (See “Do Buyout Kings Need MBAs?” by Ryan Dezember and Lindsay Gellman in The Wall Street Journal, June 3, 2015.)

Finally, employer sponsorship for graduate business degree programs has decreased significantly, compelling business schools to adopt a range of new tactics. These tactics are examined in “Company support for MBAs fell off a cliff, so schools are getting creative,” published by the Chicago Tribune on August 11, 2016. According to the article, business schools are trying to appeal to employers by offering MBA content in more flexible formats, delivering courses on-site at companies, and designing programs around problems companies need to solve.

In response to these trends, University of Iowa, Simmons University, Virginia Tech, and Wake Forest all have ended their two-year MBA programs. Wisconsin would have followed suit in 2017, but for an uproar from its students and alumni. More closures will surely come, as online programs and one-year degrees gain popularity. But there’s still time for other schools to save their full-time MBAs—if they can clarify why they exist in the first place.

Re-Examining Our Purpose

In 1970, Nobel laureate Milton Friedman set the stage for institutions to examine their purpose when he famously argued in The New York Times that the sole business of business is to maximize profits for shareholders. Friedman insisted that business should focus on doing just one thing. But the economist in me sees a more nuanced picture. There are complex trade-offs that must be considered. Sometimes that one thing is composed of several parts—a bundle of offerings, if you will—if an organization can accomplish them better together.

For example, what if a business has only one goal, but that goal is multifaceted? What if shareholders want the business to maximize profit, but only if it also incorporates corporate social responsibility? Arguably, a business should embrace corporate social responsibility if by doing so it can obtain a more favorable trade-off between profits and social good than shareholders can achieve on their own. Corporate social responsibility becomes a way to unlock hidden value.

 GMAC chart showing the number of applications to U.S.-based MBA programs declining

According to GMAC, the number of applications to U.S.-based MBA programs (as a percentage of all applications to graduate business programs) has declined steadily, from a little more than 80 percent of the total in 2007 to just over 60 percent by 2016. One reason for this trend is the increasing popularity of non-MBA master’s programs.  

The same theory holds true for business schools. If we applied Friedman’s argument to business schools, we would have to focus on doing the one thing we do best: delivering education to tomorrow’s leaders. But what if that one thing is complex and multifaceted? What if students, employers, and other stakeholders want business schools to effect positive change for business and society?

To achieve that aim, schools would need not only to turn out great leaders, but also to support researchers who can generate ideas and knowledge—and they would need to bundle together the disparate activities of research, teaching, and experiential learning. Such bundling unlocks the hidden value of business education.

In other words, as we examine the true purpose of business schools, the central question is not “What is the one thing business schools do best?” as Friedman implies. The central question is, “How can business schools create the most value for students and employers?”

To deliver that value, business schools will be required to bundle more than one activity—say, to conduct research, teach educational theory, and expose students to practice. If business schools can bundle these activities more efficiently than their students could do on their own, it makes sense for them to do so. Again, bundling increases the value of business education.

However, I have noticed a concerning trend among schools with substantial two-year MBA programs, which could undermine this objective. In response to what they see as market trends, some schools are decoupling classroom learning from experiential learning, in an effort to focus more on offering students concentrated bursts of theoretical knowledge. Others are placing less of a priority on faculty research in an effort to focus more on teaching students practical skills. Still others have begun investing more heavily in online teaching than in their physical campuses.

Such strategies represent the unbundling of theory and practice in business education, a trend that is only contributing to the decline of the MBA and the rise of online and certificate programs. The good news: I believe business schools can generate greater value by creating closer connections between educational theory and practical problem solving. The tougher news? Executing such a strategy is more challenging than many academics realize.

The Difficulties of Bundling

The first challenge relates to resources—bundling is expensive, evident in the rising cost of an MBA. In its October 4, 2017, article “Business education goes faster, younger, cheaper,” the Financial Times points out that over the past decade, the average price tag for two-year MBA programs has risen 5 percent a year—more than twice the average rate of growth in salaries for MBA holders. When business schools invest so much time and so many resources in teaching the functional areas of business and developing integrated experiential leadership, their MBA programs become longer and more expensive.

At a time when students are looking for less expensive, shorter programs, unbundling seems to make sense. Students could come to business schools to learn theory, but practice applying that knowledge once they’re on the job. If schools decoupled theory and practice, students no longer would be required to complete internships, and staff would no longer need to prepare and place job candidates. MBA programs would become shorter and less expensive. But would they still add value to the market?

The second, more difficult challenge of bundling involves research. Is it sensible for business schools to bundle teaching and research by subsidizing the cost of research with funds from tuition and donations? Wouldn’t it be more efficient to separate teaching and research, so that students purchase education from faculty and researchers compete for separate sources of funding?

As a faculty member, and as a dean, I have heard this argument from students and alumni more times than I can possibly recall. It’s tempting to respond by saying, “Of course.” But the best business schools create value for students by bundling teaching and research. Unlike think tanks that only conduct research or trade-focused schools that only teach, business schools that combine the two are able to do much more. They not only educate leaders, but also generate new ideas informed by practical problems.

The Argument for Bundling

Whether bundling is the more effective strategy for business schools turns on two points. First, where do business schools create the greatest value? And second, can MBA programs trade off theory and practice at a more favorable rate than students might achieve via an unbundled approach?

I think the value of business education lies in the generation of important ideas that shape business and in the application of those ideas to relevant problems. I recall my Harvard graduate finance professor, the late John Lintner, telling me how he benefited from being at a school that both nurtured his research and exposed him to practitioners who shared the problems they were trying to solve. His exposure to practical problems and institutional underpinnings helped him make his analytical contributions.

Because of this exposure to practice, the study of business strategy and organizations has blossomed in business schools. This has happened even though the research tools that involve these topics traditionally fall under arts and sciences disciplines such as economics, psychology, and sociology. When business schools connect the dots between research theory and practice, they create new value filled with aha moments of insight and they graduate more desirable candidates—that is, they create more favorable tradeoffs between theory and practice than students and employers can achieve on their own.

At Columbia Business School, we bridge theory and practice by integrating three themes in our programs: We teach students to innovate (think like entrepreneurs), to connect (connect the dots in business problems), and to lead (develop themselves as leaders). Within this strategy, we closely link the business school’s teaching and scholarship both to the resources of the university and to the problems of managers.

Take, for example, our New York Immersion Seminars, in which faculty first provide students with a foundational academic understanding of an industry or of trends such as shareholder activism, luxury brands, and technological disruption. Then, students explore the issue with leading practitioners who might validate, calibrate, or even outright disregard conventional wisdom. They also visit companies to see firsthand how the issue manifests in real-world business. So far, more than 1,000 students have participated in 40 seminars, and we’ve had more than 100 guest speakers from companies such as Amazon, Bank of America, Facebook, Bloomberg, and the National Basketball Association.

By linking theory to practice, our school helps both students and faculty obtain valuable insights into business. The absence of these links can have disastrous consequences. For instance, in the aftermath of the global financial crisis, the Queen of England famously questioned faculty at the London School of Economics and Political Science: “Why did nobody see it coming?” Her question underscores what can happen when business students and faculty are unaware of what is happening in the business world. By strengthening the connections between our teaching, research, and the business world, we can make the Queen’s question moot.

The Future of Bundling

In the end, the most daunting threat that many business schools currently face is the argument to unbundle theory and practice—to separate teaching and research. After all, not only is unbundling less expensive and more efficient, it also allows business schools to compete more directly with providers that deliver shorter, skill-based certifications.

But at best, unbundling will achieve only short-term efficiencies. If business schools are to survive long term, they must add value for stakeholders. To add value, they will be required to deliver bundled education successfully by drawing on their faculty’s research and their deep ties to the business community.

In 2018, Laurence Fink, CEO of the investment firm BlackRock, wrote an open letter to all chief executives, in which he asked them to clearly and rigorously describe their firms’ purpose. “Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders,” he wrote. “Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world?”

These are apt questions that all business schools should be asking. In the hubbub of applications, fundraising, marketing, rankings, and dean searches, it’s easy to forget how important it is that we yield time to basic questions of purpose. All stakeholders of business education—administrators, faculty, students, alumni, business leaders, and university governance bodies—should be deeply inquiring about what the future business of business schools will be. 

Glenn Hubbard
Dean Emeritus and Russell L. Carson Professor of Finance and Economics, Columbia Business School, Columbia University
The views expressed by contributors to AACSB Insights do not represent an official position of AACSB, unless clearly stated.
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